Chapter 14: Accounting 2

Make or Buy decision:

1. determine relevant variable and fixed cost of making or buying 2. consider supplier and your own reliability and quality 3. If reliability and quality are about the same, select alternative with lowest cost per unit

Three step process for eliminating costs:

1. eliminate past costs 2. eliminate unnecessary costs 3. eliminate costs that would not differ

how do relevant costs and revenues contribute to sound decision making?

Both merchandising and manufacturing companies make short term inventory planning decisions. One factor they consider is the profit impact of the decision. can determine the profit impact of the decision by analyzing relevant costs and revenues.

profit=

CM times number of items that are produced

CM/unit of scarce resources=?

CM/unit of product divided (units of scarce resource per unit of product)

Past costs are: a. Relevant. b. Irrelevant. c. Costly. d. Both a and c.

Irrelevant

5) What is an incremental cost? a. A cost increase resulting from a higher volume of an activity b. Profits that a company forgoes by following a particular course of action c. Costs that can be avoided d. None of the above

a

incremental cost examples

advertising, flavoring, workers, marketing

The key to deciding whether to drop a product is based on: a. Avoidable costs. b. Opportunity costs. c. Incremental costs. d. None of the above.

avoidable costs

the costs that a company must incur to perform an activity at a given level, but that it can avoid if the company reduces or discontinues the activity

avoidable costs

the costs that must be incurred to perform an activity at a given level, but that can be avoided if that activity is reduced or discontinued

avoidable costs

How does a company determine if they want to drop a product?

avoidable costs are greater than the revenues that it would not earn if production and sale of the product is discontinued

2) When should a company decide to drop a product? a. When total product costs exceeds total product revenue b. When total avoidable costs exceeds total product revenue c. When total fixed costs exceeds total avoidable costs d. d. When the product revenue has been declining

b

3) Future costs that will change as a result of a decision are known as: a. Accrued Expenses b. Relevant Costs c. Sunk Costs d. Future Costs

b

If there is no effect on the other products of a company, a product should be discontinued if: a. The avoidable fixed costs are less than the contribution margin that will be lost. b. The avoidable fixed costs are greater than the contribution margin that will be lost. c. The contribution margin of the product is positive. d. The unavoidable fixed costs are greater than the contribution margin that will be lost.

b. avoidable fixed costs are greater than the contribution margin that will be lost

4) An avoidable cost is... a. Set of alternatives available to decision makers b. Costs that must be incurred to perform an activity c. Costs that can go away if an activity is reduced or discontinued d. None of the above

c

how does a company determine whether to sell a product as is or process further?

comparing the profit of selling a product as is, with the profit from using the product as direct material in the manufacture of another product

1) Which of the following is a component of goods-in-process? a. Factory Overhead b. Direct Labor c. Direct Materials d. All of the Above

d

what costs are relevant in short term planning?

future cost and revenues

cost increases resulting from a higher volume of activity or from performance of any additional activity

incremental costs

cost increases resulting from the performance of an additional activity

incremental costs

the set of alternatives available to decision makers; thus, by choosing one alternative over another, economic benefits are given up on the alternative not chosen. always relevant costs

opportunity cost

profits that a company foregoes by following a particular course of action

opportunity costs

Profits foregone by following a particular course of action are: a. Avoidable costs. b. Opportunity costs. c. Incremental costs. d. None of the above.

oppourtunity cost

future costs and revenues that will change as a result of a decision

relevant costs and revenues

how to find contribution margin=

selling price-variable cost

past cost that are irrelevant

sunk cost

What does short term planning assume?

that current capacity is fixed since in the short term a company cannot increase its physical capacity

what two things to managers compare when making a make or buy decision?

they compare relevant incremental costs of producing the part with relevant parts of purchasing the product.

each decision must be analyzed as a distant opportunity

unique decisions

when dropping a product consider what two things?

-cost savings -lost revenue

In short term planning decisions what costs are not relevant?

-sunk costs (past) -current cost for activities that are not necessary to carry out decisions

produce units of the product with the highest contribution margin per unit of scarce resource until you do what two things:

1) satisfy the demand for the product 2) run out of the scarce resource

Product mix decision:

1. Advertising: compare incremental total contribution margin to incremental fixed advertising costs 2. Production: for each product, determine the contribution margin per unit of scarce resource. Allocate scarce resource in sequential order until resource is "used up"

Dropping unprofitable product decision:

1. compare avoidable cost to lost revenues 2. Drop product only if total avoidable cost > lost revenue from dropping the product

4 steps to decision making

1. define a problem 2. identify alternative solutions 3. evaluate alternative solution 4. make decision

special order decision:

1. determine incremental revs 2. determine incremental costs 3. accept if incremental revenues are > incremental costs

sell or process further decision:

1. determine relevant revenues from selling or processing further 2. Determine relevant variable and fixed cost from selling or processing further 3. Select alternative with higher incremental profit